Question & Answer

What impact has the SEC’s Regulation Fair Disclosure (FD) had on securities firms? (LO2) 

How did the Financial Services Modernization Act affect securities firms? (LO2)

Explain how the credit crisis of 2008–2009 encouraged some securities firms to convert to a bank holding company (BHC) structure. Why might the expected return on equity be lower for securities firms that convert to this structure? (LO5)

Most securities firms experience poor profit performance during periods in which the stock market performs poorly. Given what you know about securities firms, offer some possible reasons for these reduced profits. (LO3)

Why do securities firms typically have some inside information that could affect future stock prices of other firms? (LO1)

Why was the Federal Reserve concerned about systemic risk due to the financial problems of Bear Stearns? (LO5)

Explain why securities firms have used a high level of financial leverage in the past. How does such leverage affect their expected return and their risk? (LO4)

What is asset stripping? (LO1)

Explain the process of proprietary trading by securities firms. How was it affected by the Volcker Rule? (LO1, LO5)

Explain why securities firms from the United States have expanded into foreign markets. (LO1)

Describe a direct placement of bonds. What is an advantage of a private placement? What is a disadvantage? (LO1)

Why did Lehman Brothers experience financial problems during the credit crisis? (LO5)

What is a best-efforts agreement? (LO1)

Describe the underwriting function of a securities firm. (LO1)

Describe the origination process for corporations that are about to issue new stock. (LO1) 

How do securities firms facilitate leveraged buyouts? Why are securities firms that are better able to raise funds in the capital markets preferred by corporations that need advice on proposed acquisitions? (LO1)

What is the purpose of the SIPC? (LO2)

Explain the role of the SEC, FINRA, and the stock exchanges in regulating the securities industry. (LO2)

A critic recently claimed that hedge funds increase market volatility when they publicize (and document) that a public corporation exaggerated its earnings. The critic argued that hedge funds should not be allowed to make such public statements and should not be allowed to take short positions that bet against the firm that is being criticized. Write a short essay that supports or refutes this opinion. 

Explain hedge funds’ motivation to rely on expert networks in recent years. (LO4)

In recent years, private equity funds have grown substantially. Will the creation of private equity funds increase the semistrong form of market efficiency in the stock market? Explain. (LO5)

Equity mutual funds and private equity funds generate returns for their investors in different ways. Which type of fund do you think would be better able to capitalize on a weak, publicly traded firm that has ignored all forms of shareholder activism? (LO1, LO5)

Money that individual and institutional investors previously invested in stocks is now being invested in private equity funds. Explain why this should result in improved business conditions. (LO5)

Explain why hedge funds may be able to achieve higher returns for their investors than mutual funds do. Explain why hedge funds and mutual funds may have different risks. When the market is overvalued, why might hedge funds be better able to capitalize on the excessive market optimism than mutual funds can? (LO1, LO4)

Consider the prevailing conditions that could affect the demand for stocks, including inflation, the economy, the budget deficit, the Fed’s monetary policy, political conditions, and the general mood of investors. Based on the current conditions, recommend a specific type of stock mutual fund that you think would perform well. Offer some logic to support your recommendation. (LO2)